May 11, 2016 – A flaw in the design of the Ontario Retirement Pension Plan (ORPP) could unfairly penalize employers as well as the people the plan intends to help, according to a new C.D. Howe Institute report. In “DC Plans and the ORPP: Why Fees Matter,” authors James Pierlot and Barry Gros show how employers who pay pension plan expenses, such as investment management and regulatory compliance costs, could be unfairly excluded from having their plans deemed ORPP-comparable and therefore excused from making ORPP contributions.
“One would think that it would be easy to compare defined-contribution (DC) pension plans by simply looking at what is being contributed by plan members and their employers, respectively. But getting to the heart of the matter requires a bit more digging,” say the authors.
For Ontario employers, in particular, the authors show that recognition of some DC-plan inputs (i.e., direct contributions) and not others (i.e., employer-paid expenses) for purposes of determining “comparability” with the looming ORPP may result in some DC plan sponsors being required to make ORPP contributions, even though their plans deliver member outcomes that are equal to or better than DC plans sponsored by employers who will be permitted to opt out of the ORPP.
The authors argue that this would also lead to the undesirable consequence of discouraging employers from sponsoring DC pension plans with employer-paid expenses, which deliver the best results for employees.
“We demonstrate that plans with employer-paid expenses deliver superior returns compared to plans in which only direct contributions are made,” state the authors.
To ensure that this model is adopted more broadly and – at a minimum – not discouraged, the authors urge the Ontario finance minister to develop a policy that includes employer-paid expenses as contributions for purposes of establishing which DC pension plans will be regarded as ORPP-comparable.
The authors note that while the issue of ORPP-comparability affects only Ontario employees and their employers, the steadily increasing membership in DC plans nationally suggests that a dialogue about DC expenses and how they are paid is of significant and increasing importance to all Canadian DC plan sponsors and their members.
Click here for the full report.
The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada's most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.
For more information contact: James Pierlot, Principal and Lawyer, Pierlot Pension Law; Barry Gros, former Associate Partner, Retirement, Aon Hewitt; 416-865-1904, or email: kmurphy@cdhowe.org.